War on Commodities: More Credit Margin Hikes for Copper and Platinum

I pointed out US Federal Reserve Ben Bernanke’s most recent statement

If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation

It would seem that Mr. Bernanke has been applying the power of suggestion, in the implication that his favorite tool, the Helicopter option (QE), would only be used when the menace of a ‘deflation risk’ is present.

What better way to convey the impression of deflation than by having commodity prices fall.

And perhaps through indirect channels, the team Bernanke may be influencing credit margins policies of the CME.

From marketwatch.com,

CME Group the parent company of the New York Mercantile Exchange, on Monday raised margin requirements for trading copper and platinum futures contracts. The changes go into effect Tuesday. Margins are money investors must put up to be able to trade and hold futures contracts. Initial requirements for copper contracts on the Comex division rose to $7,763 per contract from $6,750, and maintenance margins climbed to $5,750 each contract from $5,000. For platinum futures on Nymex, initial requirements were hiked to $4,950 per contract from $3,850, and maintenance margins rose to $4,500 each from $3,500

This war against commodities has been in place since May.

Intervening in the markets essentially distorts price signals which consequently creates supply-demand imbalances that would lead to more volatile price actions.

Furthermore, manipulating policies to pick on winners (in this case favors the commodity shorts) only politicizes the markets.

Lastly, I would say that in piecing together the jigsaw puzzles, Ben Bernanke has earnestly been trying to achieve the perception of ‘deflation risk’ by adding more pressures to the marketplace

US in a Deflationary Environment, NOT! (In Charts)

The mainstream meme has been about the US economy being embroiled in a ‘liquidity trap’, therefore enduring a deflationary environment.

There have been many signs that the US economy seems flagging of late. (The following 2 wonderful charts from Bespoke Invest)

But there hardly seem signs of deflation with money aggregates skyrocketing (charts from St. Louis Fed)

M2…

MZM…

And credit environment has been conspicuously improving too.

For businesses…

And so with consumer loans…

Importantly, the current economic landscape has certainly NOT BEEN A PROBLEM OF CONSUMER SPENDING, which have much been bruited about by deflationists.

(chart below from Professor Mark Perry)

…but from the lack of investments. (See Robert Higgs magnificent explanation here)

Lastly, US CPI inflation keeps ascending (again from Bespoke)

…yet one would note that the calculation for the CPI index may not be accurate or has vastly understated the above inflation rates, perhaps for political reasons (Wikipedia.org).

The composition of CPI index has been disproportionately weighed towards housing.

Great chart above and below from DSHORT.com

And in looking at the performance of each of the components…

…we find that except for the apparel, the entire spectrum of goods and services in the CPI basket has been ascendant! With the only difference seen at the relative performance of prices.

Bottom line:

What Deflation, where?

NOT until central banks will cease and desist from inflating either forced by markets or by politics, and NOT until central banks will sacrifice to the alter of economics and the markets, the high privileged but beleaguered banking cartel.

Bonds markets have NOT been an accurate indicator, for the simple reasons of government designed financial repression and or government manipulation (QEs).

In planet earth, we see inflation as THE predominant theme or the prospects of a stagflation (which could transit into hyperinflation) risk.

And with global political authorities coordinating efforts to intensify inflationism in the hope that the liquidity therapy will solve the malady of insolvency, then expect MORE INFLATION ahead.

Deflation, which has signified as a bogeyman, will be further used to justify expanded inflationism which in reality has been designed to preserve the existing political order.

As the great Ludwig von Mises wrote

It is no answer to this to object that public opinion in the capitalist countries favors the policy of cheap money. The masses are misled by the assertions of the pseudo experts that cheap money can make them prosperous at no expense whatever. They do not realize that investment can be expanded only to the extent that more capital is accumulated by saving. They are deceived by the fairy tales of monetary cranks. Yet what counts in reality is not fairy tales, but people's conduct. If men are not prepared to save more by cutting down their current consumption, the means for a substantial expansion of investment are lacking. These means cannot be provided by printing banknotes and by credit on the bank books.

Unfortunately for us, political authorities and their zealots, fables are seen and adapted as reality, where we have to bear the consequences of their actions.

Popular Sentiment Over Deflation Recedes

Aside from failed effects of the fiscal stimulus, one of the factors that could have been swaying political sentiment against Keynesian economics is the inordinate focus on “deflation”.

Yet for all the supposed threats that deflation would bring, there has been little signs of the emergence of the bogeyman since the culmination of the crisis.

This popular sentiment may have reached a "tipping point".

This from the Wall Street Journal Blog,

Deflation anxieties may be about to spur the Federal Reserve to do more to help the economy, but for bond traders, fears of a downward spiral in prices appear to be pretty low.

A paper published Monday by the Federal Reserve Bank of San Francisco said that based on pricing levels in the inflation indexed government bond market — the securities are commonly called TIPS — investors are sanguine the economy can escape a crippling bought of falling prices…

Fed officials fear that while growth remains positive, it is not powerful enough to overcome the ground lost over the course of the recession, leaving inflation at dangerously low levels, and unemployment unacceptably high. They want to act to help get growth levels higher, even though many economists and some in the Fed wonder if the institution can be effective in boosting activity, given that borrowing rates are already near historic lows and the financial system is flush with liquidity.

The TIPS market has long been one of the ways policymakers, economists and market participants could get a handle on the outlook for inflation. That said, the use of TIPS to tell a broader story is a complicated task.

The rap against the TIPS market goes like this: It is a relatively new market sector, and it has less liquidity than other parts of the Treasury trading world. That means price movements can be signaling something other than a shift in investors’ inflation outlook. In the market’s favor, however, is the fact that it at least represents a real money bet on something — an investor can lose cash if they predicted the pricing outlook incorrectly. In any case, Christensen argued his model compensates for these factors.

The gold market has been saying this ever since.

And as we long been saying here, false premises will eventually be unmasked.

Société Générale: How To Insure One's Portfolio Against A Debt Crisis Induced Economic Collapse

One of Europe's major financial institutions, the Société Générale, in a recent study "Worst Case Debt Scenario" highlighted on the risk of a possible government debt induced crisis that could lead to another global economic collapse.

According to their worst case scenario, one's investment profile should consist of:

-Sell the dollar as a declining dollar could provide a means to reduce global imbalances.

-Positive on fixed income as rates would fall in a Japanese-style recovery. Prefer defensive corporates (telecom, utilities) which have the lowest risk of transitioning into high-yield and should perform well in a more risk averse environment.

-Sell European equities as markets have already priced an economic recovery in 2010e. Under a bear scenario, this optimism could be dashed once restocking is over and fiscal stimulus (especially for the auto sector) has dried up.

-Cherry pick commodities given the diverse nature of this asset class. Agricultural commodities would probably fare best, but are difficult to forecast given high exposure to weather conditions. Mining commodities (particularly gold) are also a hedge against a softening dollar and could be favoured by persistently strong demand from emerging markets, particularly China.

I really don't share the parallels of Japan's experience as the 'right' model for the next crisis and would lean on a highly inflationary backdrop or a debt default.

Nevertheless, like socgen, we are hopeful for a miracle from extraordinary economic growth in emerging markets, based on free trade or globalization to help ease on such imbalances. But internal policies matter.

The complete report shown below:
SocGen - Worst Case Debt Scenario